Actually, that statement requires some qualification. It's not so much putting capital into the stocks and shares of entities listed on public stock exchanges that's the loser's game. Indeed, the long-run returns from most of the developed world's stock markets indicates the opposite. The losers are almost all of those players who assume - and perhaps even imagine - that their choice of investments will perform better than the market they are betting against.
So what do I mean by a 'loser's game'? It's one where a player thinks he can win but does not actually possess the skills to do so. Up to a certain level, that's how it is in tennis. Your average club player thinks he has the skills, energy and whatever else to win a match, but in reality he doesn't. Too often he double faults on serve, his ground strokes dribble tamely into the net and he slaps his volleys long. The more it becomes plain that his best isn't sufficient, the more he doubles his efforts, tries too hard and makes even more mistakes. Essentially, he loses by making too many unnecessary errors and his opponent wins not by doing anything especially clever but by making fewer mistakes.
And it's an unpalatable truth that something similar happens in the sport of equity investment. And it's partly because the truth is so unpalatable that equity investing has become a loser's game. After all, confronted with the assertion "You cannot beat the market", investors divide into three camps. A very small minority will examine the evidence, accept the truth of the assertion and change their investment plans, which probably means buying index-tracking funds. However, most divide into the other two. Either they accept the truth of the statement, but contrive to believe that somehow it won't apply to them (which, maybe, is where Bearbull resides). Others - despite the evidence to the contrary - will simply refuse to believe the premise.
Maybe their response would be different if the proposition were stated differently. How about the following? When an investor reckons he can beat the market then his mindset is much the same as the punter at blackjack who believes he can beat the house. In effect, the house bet is the price of all the stocks in an index at any given time. So the investor's task is to re-arrange his bets so their outcome is better than the market's.
That's simple enough in theory, but in practice thousands of investors - some more clever, some better informed - are doing just the same. The sum of all their punts aggregates to the market - that's where the house bet comes from. At any time, some investors will be making better bets than the market, some worse. But the chances that any investor - however skilled or lucky - can consistently make better calls than the house are about the same as the patsy playing blackjack.
Not just that, but the liquidity of modern, well-developed markets works against each investor because it makes it so easy for so many to play the game. Even so, there are still costs that eat into performance. And the more that anxious investors re-arrange their bets to compensate for poor performance - the investment equivalent of trying too hard - the more that costs will erode returns. As a result of these factors, equity investment - which, conventional wisdom has it, was once a 'winner's game' - has morphed into this loser's sport.
So what's to do? If investors won't or can't stop playing the game of active investing, then how should they adapt? Again, some sporting metaphors help. Take the most important sports advice of all - keep it simple. As Simon Ramo, the tennis coach who coined the notion of the loser's game, noted: "Every game boils down to doing the things you do best and doing them over and over again."
In investing that means two things. First, narrow your area of expertise; not just, say, equities as opposed to bonds, but particular types of equities - income or growth stocks (but not both); recovery plays; asset situations. Maybe focus on financial analysis; maybe on just one or two industries. It does not matter. What matters is that you choose how and where to play the game. That gives you an edge,
Second, do less. One consequence of the loser's game is that on average anything you do will be a mistake. In which case, make fewer investment decisions. Deliberately ration yourself; maybe to a maximum of three buying decisions a year. Hopefully, less will be more.
Meanwhile, concentrate on defence. If the logic of the loser's game is that it's tough to outperform the market on buying decisions then focus on when to sell since that side of investing gets less attention. Besides, another consequence of the loser's game is that the really big problems you will encounter over the coming year are already sitting in your portfolio. Identify and remove them and you stand a better chance of winning in the loser's game. But don't beat yourself up too much if you don't.
